The European Insurance and Occupational Pensions Authority (EIOPA) issued a Supervisory Statement on the application of the proportionality principle in the supervision of the Solvency Capital Requirement (SCR) calculated in accordance with the standard formula.

EIOPA identified potential divergences in the supervisory practices concerning the supervision of the calculation of immaterial SCR sub-modules. While EIOPA agrees that in the supervisory review process in case of immaterial SCR sub-modules the principle of proportionality applies, it stresses the importance of supervisory convergence as divergent approaches lead to supervisory arbitrage. Consistent implementation of the proportionality principle is key to ensure supervisory convergence for the supervision of the SCR. To guarantee supervisory convergence and consistent application of the proportionality principle EIOPA considers the following key areas:

• Proportionate approach: Supervisory authorities may allow undertakings, when calculating the SCR at the individual undertaking level, to adopt a proportionate approach towards immaterial SCR sub-modules subject that the undertaking is able to demonstrate required facts to the satisfaction of the supervisory authority. Such facts include among others the justification of the nature and complexity of the risk, consistency with future business model and strategy, stability of the sub-module pattern during the past three years and established proper processes to monitor and evaluate the risks. For the calculation of the SCR at group level, this approach does not apply.
• An SCR sub-module should be considered immaterial for the purposes of the SCR calculation when its amount is not relevant for the decision-making process or the judgement of the undertaking itself or the supervisory authorities.
• Prudent calculation: For such immaterial sub-modules, the SCR sub-module should be calculated using prudently estimated inputs, leading to prudent outcomes at the time of the decision to adopt a proportionate approach and subject to the consent of the supervisory authority.
• In this case, supervisory authorities may allow undertakings not to perform a full recalculation of such a sub-module on a yearly basis taking into consideration the complexity and burden that such a calculation would represent when compared to the result of the calculation.
• Risk management system and Own Risk and Solvency Assessment (ORSA): the proper monitoring of any evolution of the risk, either triggered by internal sources (such as a change in the business model or business strategy) or by an external source (such as an exceptional event that could affect the materiality of a certain sub-module), should be ensured. Such a monitoring should include the setting of qualitative and quantitative early warning indicators defined by the undertaking and embedded in the ORSA processes.
• Supervisory reporting and public disclosure: Undertakings should include information on the risk management system in the ORSA Report as well as structured information on the sub-modules in the Regular Supervisory Reporting and in the Solvency and Financial Condition Report.
• Supervisory review process: In the context of the on-going supervisory dialogue the supervisory authority should be satisfied and agree with the approach followed by the undertaking and be kept informed in case of any material change. Vice versa, the supervisory authority should inform the undertaking in case there is any concern. In case of any concern, the approach should not be implemented or only subject to additional safeguards, the latter agreed between the supervisory authority and the undertaking.
• EIOPA is closely monitoring the application of the proportionality principle using its regular supervisory convergence tools such as peer reviews.